Abstract
The study aims to examine whether the intensity of financial openness, trade openness and foreign direct investment promoted financial development in Turkey for the period 1974–2014. Three financial development indicators are used constructing the data from the World Development Indicators. Autoregressive Distributed Lag Model (ARDL) and the bounds tests are employed to show the long run relationship among variables. The empirical results suggest that financial openness and foreign direct investment have a predictive power in fostering financial development. More, trade openness does not have predictive power on financial development. It can be concluded that financial openness and foreign direct investment can be used to foster financial development as well as economic growth in the case of Turkey. These results has very important inferences on the Turkey’s Custom Union agreement with the European Union.
Highlights
In this study, we aim to investigate the sources of financial development for an emerging market economy and relief an evidence whether financial and trade openness lead financial development in an emerging market structure as in Turkey
The empirical results suggest that financial openness and foreign direct investment have an effective role in promoting financial development
Trade openness has no impact on financial development
Summary
We aim to investigate the sources of financial development for an emerging market economy and relief an evidence whether financial and trade openness lead financial development in an emerging market structure as in Turkey. Financial liberalization might affect the economic growth, the main question in the chain is whether or not that financial liberalization in the form of financial openness and trade openness would cause any financial development in an emerging market such as Turkey. More than three decades the Turkey liberalized foreign trade choosing export-led growth model while the economy has been showing very volatile performance. When it became to 1990’s, the capital accounts were completely liberalized while capital flows as in the high records and tariffs were lowered. In the period of financial liberalization, Turkey experienced three major financial crises due to trade deficits and as a result of these turmoils economic recession was inevitable
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